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W.W. Grainger Inc. (NYSE: GWW) is a distributor of industrial supplies serving the maintenance, repair, and operational (MRO) needs of businesses across North America through catalog sales and approximately 600 storefront locations. Grainger sells parts in most common industrial product categories—from hydraulic pumps to drill bits. The MRO market is highly fragmented, and Grainger, with 4% market share, is by far the largest player. Grainger aims to increase sales by reaching new customers and encouraging customers to treat Grainger as a one-stop shop for hardware purchases, including purchases they might otherwise make from a more specialized distributor. Toward those ends, Grainger is increasing store coverage in U.S. cities, recently opened a distribution center in Shanghai, and is expanding catalog offerings dramatically. Grainger’s earnings in the coming years will depend on largely the health of the MRO market in the United States. Revenues may also grow relative to GDP if Grainger succeeds in increasing its customer base and sales per customer. Several initiatives to cut costs and shift business to higher-margin product lines are likely to improve margins, but the scale of this improvement is still uncertain.
[edit] History & BusinessesW. W. Grainger Inc. was founded in 1927 as a wholesale distributor of electric motors. By 1936, Grainger had 15 branches across the United States. By the late 1930s, Grainger had begun to move beyond motors and launched Dayton, a private label brand that Grainger still sells today. The company went public in 1967. Today, Grainger is comprised of several divisions: Grainger Branch-based serves the U.S., Puerto Rico, Mexico, and China, through branch, catalog, and internet sales. It accounted for almost 80% of order volume and about 83% of Grainger’s revenues ($4.91 billion) in 2006. Grainger branch based is divided into several business units. The largest is Grainger Industrial Supply, which serves the U.S. with 426 branch locations, each supported by one of 15 larger distribution centers. Grainger Industrial Supply filled an average of 89,000 orders daily in 2006, compared to 115,000 daily for Grainger overall. Smaller business units serve emerging markets. Grainger, S.A. de C.V. averages 900 transactions daily with eight branch locations and one distribution center in the highly-industrialized Mexican states of Chihuahua, Nuevo Leon, and Baja California. Grainger Caribe Inc. serves Puerto Rico. Grainger China LLC was established in 2006 with one distribution center and one customer pick-up location in Shanghai. Acklands-Grainger Branch-based is the equivalent of Grainger Branch-based for the Canadian market. It operates 155 branches and 5 distribution centers in the more densely populated areas of Canada, averaging 15,000 transactions daily. Until January 2006, Acklands-Grainger earnings were reported as a component of Grainger Branch-based earnings. Acklands-Grainger accounted for less than 10% of revenues ($565 million) in 2006. Lab Safety Supply Inc. is an independent subsidiary that Grainger acquired in 1992. Lab Safety distributes safety and material handling equipment through an array of direct marketing catalogs that target different industries. Lab Safety brought in $411 million in 2006, about 7% of Grainger's total revenues.
[edit] Trends and Forces Source: Wachovia U.S. Industry Because Grainger derives the great majority of its revenues from U.S. sales, it is vulnerable to downturns in the U.S. economy. Grainger’s customer base spans many industries. But most of Grainger’s customers are themselves vulnerable to economic cycles. Commerical construction, for example, is a highly cyclical business that accounts for 19% of Grainger’s revenues. In the near term, Grainger’s revenue growth should rise and fall with the U.S. economy. In the long term, Grainger’s dependence on U.S. industry has more serious potential drawbacks. Despite impressive productivity growth over the last thee decades, U.S. manufacturing is still threatened by rising labor costs. If costs continue to increase, more manufacturers are likely to move off-shore, diminishing Grainger’s customer base. Grainger’s long-term success will depend on how well it adapts to serve new customers, in the U.S. or abroad. Natural Disasters While Grainger's revenues currently depend most on the U.S. econonmy, they also spike in the wake of some of economically devastating natural disasters. It is estimated that sales resulting from rebuilding after Hurricane Katrina contributed $8 million to Grainger's revenue in Q3 2005. The timing of natural disasters should not concern long term investors but can account for differences between projected and actual earnings that affect share price. Fuel Costs Keeping Grainger's stores and distribution centers stocked is a significant logistical feat. Fuel costs contribute to the costs of stocking material and shipping to customers. Grainger surely pays the fuel surcharges that freight carriers have recently added to their fees. To date, however, distributors have passed most of this cost on to customers. If the scale of fuel cost increases changes in coming years, distributors including Grainger may not be able to pass on the increases so easily. [edit] Grainger's Strategic ExpansionsMarket Grainger now reaches approximately 1.8 million customers. Grainger’s near-ubiquitous presence in American industrial parks allows most customers to take advantage of store will-call service, which is cheaper and often faster than express shipping. Speed is a significant advantage in the MRO market, where, by one estimate, 40% of purchases meet unexpected needs. In 2003, Grainger announced a major U.S. Market Expansion iniatitive designed to make Grainger still more convenient for customers. Between this announcement and the end of 2006, Grainger opened 43 new U.S. locations, largely in America’s fastest-growing metropolitan areas: Dallas, Houston, Denver, Tampa, Kansas City, San Diego, and Southern California’s Inland Empire. More quietly, Grainger is also expanding into Mexico and China, emerging markets with rapid growth in the manufacturing sector. Grainger’s Mexican operation increased revenues by 20% in 2006 over 2005, mostly because the Mexican market grew as much. In the United States, there has long been a correlation between Grainger’s revenues and the health of the MRO market. Grainger’s international operations may evolve into an answer to critics who say that Grainger cannot grow in the long term if cost pressures force more U.S. manufacturing off-shore. Product Line Grainger’s sales volume doubtless allows the company to negotiate impressive volume discounts from suppliers. But critics say that big supplier deals come with some sacrifices for Grainger. Within product categories, Grainger generally offers less variety in size, material, and other specifications than its MRO competitors MSC Industrial Direct Company (MSM) and McMaster-Carr. Historically, frequent supplier and brand substitutions have changed catalog offerings year-to-year, frustrating some customers. Grainger’s current product line expansion promises to correct these shortcomings. In the 2006 catalog, Grainger added 30,000 new fasteners (screws, nails, nuts, bolts) to 3,000 existing offerings, a move that aims to capture market share from smaller fastener distributors and the national giant Fastenal Company (FAST). For 2007, Grainger has added another 23,000 items to its offerings across several product categories, especially plumbing and material handling (hoists, casters, conveyor, bearings). Grainger also offers to source items it does not carry upon request. [edit] CostsCOGS The most significant cost any distributor faces is always the cost of goods sold (COGS). In 2006, Grainger spent 60% of sales revenues on merchandise, down from 62% in 2004. Grainger aims to reduce this figure further in the next few years. Plans to increase sales of high-margin items such as a fasteners and focus sales teams on the industries that buy such items should have a gradual impact on COGS as a percentage of revenue. More significantly, Grainger plans to increase the amount of merchandise it purchases abroad, in markets where industrial supplies are manufactured and sold more cheaply than in the U.S. In the distribution business, this practice is known as global sourcing. In 2005, Grainger sourced about 5% of its merchandise (by revenue) globally. Management aims to make that figure 30% by 2010. Cost savings from this effort are expected to add 1-2% to Grainger’s profit margin (9-10% in recent years). There is surely room to cut costs by global sourcing. But global sourcing has risks as well. Customers doubt the quality of foreign-made products in many product categories—a fact of the industrial supplies market that Grainger has side-stepped to date by selling most of it foreign-made products under private label brands. Operational Grainger can be more ruthless about cutting operational costs. Operational costs represented 12% of revenues in 2006, a respectable figure by industry standards. Still, they should decrease in coming years. After a full year of planning, Grainger recently implemented a new SAP software system in 2006. The implementation should reduce the resources required for all transactions, especially non-sales transactions (such as availability and order-status inquiries). Further, market expansion initiatives in the U.S. and abroad have already incurred significant operational costs while it may be a few years before they generate expected revenues. [edit] CompetitionMost of Grainger’s competitors are nothing like Grainger. In the highly fragmented MRO market, Grainger’s 4% market share is larger than any other distributor’s. While Grainger originally dealt only motors and electronics, it now covers almost every industrial product category and derives no more than 15% of revenue from any one. Most of Grainger’s competitors are small, often family-owned, local distributors that specialize in single area. Even national distributors usually focus more on a single product category than Grainger does. Even the handful of national distributors whose product lines are as diverse as Grainger’s have significantly different business models. MSC is another general industrial supplies distributor with a big catalog, a web interface for placing orders, widely dispersed branches, and a traveling sales team. But MSC’s revenues were $1.3 billion in 2006, compared to Grainger’s $5.9. More importantly, MSC emphasizes its same-day shipping guarantee (for some products) and vendor managed inventory (VMI) service while Grainger emphasizes the convenience of its many locations and it’s ability to drop ship material from many suppliers directly to its customers. Differences like these represent strategic choices and make it difficult to compare distributors on the basis of ratios such as operating costs/revenues. By committing to shipping items same day, a distributor like MSC commits to purchasing those items more frequently and/or in larger quantities. That purchasing decision increases the costs of holding inventory and of depreciation. It may also result in increased material costs, if a distributor sacrifices volume discounts for more frequent, smaller quantity purchases. Home Depot's HD Supply Facilities Maintenance is an important newcomer to the MRO market. HD Supply Facilities Maintenance aims to serve construction projects from design to completion and beyond. After Home Depot’s 2006 acquisition of Hughes Supply Company, the division’s name was changed from HD Supply to emphasize that it offers maintenance as well as construction supplies. HD Supply Facilities Maintenance is already huge, with revenues of $12 billion 2006. But most of those revenues flow from the lumber and other construction materials markets. At least in the near term, HD Supply’s impact on Grainger’s market share should be negligible, because it has only just entered the MRO market and focuses on a subset of the items Grainger carries.
[edit] Web LinksW.W. Grainger, Inc. Lab Safety Supply, Inc. Competitor Links General MSC McMaster-Carr HD Supply Facilities Maintenance Construction,Hardware,Fasteners Fastenal HD Supply Facilities Maintenance Electrical GE Supply Co Newark InOne WESCO Mechanical Power Conversion & Transmission, Material Handling Motion Industries Applied Industrial Technologies Kaman Industrial Technologies [edit] References |
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